Adventures in Smarshland

May 3, 2009

Less Obvious Social Security Flaws

Filed under: Uncategorized — smarsh @ 6:40 pm

Each year three months before you birthday, the social security bureaucracy sends you an estimate of your benefits based on “current law”.  Let’s ignore all the obvious actuarial flaws in the social security funding mechanism for a moment and look at the raw benefit calculation.  First you calculate your average monthly gross earnings for your highest 35 years of work, the result of this is called your Average Indexed Monthly Earnings.  There is a “indexing” adjustment made to your earnings to adjust in effect for inflation.  Then the calculation is much like the same as calculating taxes, except the marginal rates get small as AIME gets larger.  The first $606 get you 90% of your AIME, the next ~$3000 only get 32% marginally, and AIME above than adds 15% marginally.  In other words you don’t have to work very hard to get the majority of the benefit you would receive even if you worked alot more.  In fact you only need to earn ~$250,000 over your entire life to get the maximum of the first “bracket”.  I am quickly approaching this value and question why I should work so hard given the manner in which tax brackets and social security funding “brackets” are set up.  In taking into consideration the tradeoff between allocation of time to labor force participation and leisure, the government is certainly stacking the deck in favor of leisure.  The one thing that would prevent me from exiting the labor force would be having to pay for medical insurance privately, but I hear our President might “fix” that soon.

2 Comments »

  1. What kind of crazy talk is this – didn’t you hear: the Laffer curve doesn’t exist.

    Comment by nordsieck — May 3, 2009 @ 7:31 pm

  2. Yes, by the head in sand principle.

    Comment by smarsh — May 4, 2009 @ 8:04 pm

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